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An Analysis of Optimal Farm Capital Structure

  • Wesley N. Musser (a1), Fred C. White (a1) and John C. McKissick (a2)


Use of debt in financing agricultural firms is an issue of perennial interest. Much of this interest reflects farmers’ disastrous experience with debt during the Great Depression. The foreclosed mortgages and bankruptcies of that era reaffirmed an historical feeling that achieving a level of zero debt or financial leverage was a high priority goal. E. G. Johnson, who was Chief of the Economic and Credit Research Division of the Farm Credit Administration, articulated the position in the 1940 Yearbook of Agriculture that this goal is even more important than increasing profits: “It may be well to emphasize again that while credit properly used may help farmers to increase their income and raise their standard of living, the fact must not be overlooked that more credit will not cure all the ills of agriculture. The greatest need is to assist the farmers in getting out of debt, not deeper into it,” [6, p. 754]. As memories of the Great Depression faded, agricultural economists tended to emphasize the effect of debt on farm size and therefore net income.



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[2]Brigham, Eugene F. and Smith, Keith V.. “The Cost of Capital to the Small Firm,” The Engineering Economist, XIII, Fall 1967, pp. 126.
[3]Heady, Earl O.Economics of Agricultural Production and Resource Use, Prentice-Hall Inc., Englewood Cliffs, New Jersey, 1952.
[4]Herr, William.Understanding Changes in Non-real Estate Farm Debt,” Agricultural Finance Reuiew, Volume 23, November 1967, pp. 2332.
[5]Hopkin, John A., Barry, Peter J. and Baker, C. B.. Financial Management in Agriculture, Danville, Illinois: The Interstate Printers & Publishers, Inc., 1973.
[6]Johnson, E. C.Agricultural Credit,” Farmers in a Changing World, U.S. Department of Agriculture, Washington, D.C.: U.S. Government Printing Office, 1940, pp. 740754.
[7]Lins, David.Determinants of Net Changes in Farm Real Estate Debt,” Agricultural Economics Research, U.S. Department of Agriculture, Economic Research Service, Volume 24, January 1972.
[8]Lins, David and Donaldson, Timothy R.. “Explaining Farm Operators Debt: An Application of the Automatic Interaction Detector Technique,” Contributed Paper, American Agricultural Economics Association Annual Meeting, Pennsylvania State University, University Park, Pennsylvania, August 15-18, 1976.
[9]Penson, John B Jr. “Demand for Financial Assets in the Farm Sector: A Portfolio Balance Approach,” American Journal of Agricultural Economics, Volume 54, No. 2, May 1972, pp. 163174.
[10]Solomon, Ezra.The Theory of Financial Management, New York: Columbia University Press, 1963.
[11]Weston, J. Fred and Brigham, Eugene F.. Managerial Finance, Fifth Edition, Hinsdale, Illinois: Dryden Press, 1975.

An Analysis of Optimal Farm Capital Structure

  • Wesley N. Musser (a1), Fred C. White (a1) and John C. McKissick (a2)


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